Britain is weary of spending cuts. Mark Rowley, the Metropolitan Police commissioner, has warned that forces bear the “scar tissue of years of austerity”. Nigel Farage, in his new natalist guise, has called for the abolition of the two-child benefit cap. Cabinet ministers in unprotected departments revolt against the prospect of further cuts.
Sources dismiss reports that Angela Rayner and Ed Miliband “stormed out” of a meeting with Darren Jones, the Chief Secretary to the Treasury (“It was cordial and it was virtual,” insists one insider). But they do not deny the tensions within government ahead of Rachel Reeves’ Spending Review.
Rayner, tasked with delivering 1.5 million new homes by the end of this parliament, fears this pledge will be impossible to meet without a significant increase in spending on social housing (funding for the affordable homes programme only lasts until next year). She also wants additional support for local government to prevent further council bankruptcies (the number reliant on “exceptional” support has risen from 18 to 30 over the past year).
Other cabinet ministers yet to settle with Reeves include Yvette Cooper, Ed Miliband and Steve Reed – all lead unprotected departments and have their own unenviable targets. At the election, Labour pledged to provide 13,000 more neighbourhood police officers, to halve knife crime and to halve violence against women and girls. It promised to upgrade five million homes to cut energy bills and reduce emissions. And it vowed to “champion British farming” (post-Brexit subsidies are expected to be slashed). The Spending Review is the moment at which ambition will collide with reality.
The Treasury dismisses any talk of a return to austerity. To Labour critics calling for Reeves to raise taxes or loosen her fiscal rules it points out that the Chancellor has already done both. Earlier this week, Reeves boasted that the latter would enable £113bn of new capital investment in homes, transport and energy.
But the Chancellor faces two self-imposed constraints. First, though she loosened her rules in one area, she tightened them in another (in a bid to maintain market confidence). Rather than balancing the current budget within five years, Reeves has pledged to do so within three years. This is the target that is now necessitating cuts to unprotected departments.
“Capital spend takes time, and day-to-day spending is still massively tight and constrained,” a minister told me. “Interventions that will have an impact on voters in the first four years are off the table, and that’s what’s killing us. Borrowing has gone up but we’re not borrowing to do the things that we want to do – we’re borrowing to fix the mess of the last lot.”
Chancellors caught in such a bind would normally raise taxes, but here Reeves faces her second constraint. She has vowed not to increase income tax, National Insurance (on employees), VAT and corporation tax for the duration of this parliament – the taxes that account for 70 per cent of government revenue. As a consequence, ahead of her next Budget, the Chancellor faces a desperate search for alternatives. U-turns on winter fuel payment cuts and (most likely) the two-child benefit cap only intensify the pressure.
Here is precisely why some ministers believe Reeves should have used Donald Trump’s inauguration and the rise in UK defence spending to stage an “economic reset” – loosening her fiscal rules and/or revising her tax pledges. That, both No 10 and No 11 believe, would have carried a high economic and political price. But the risk for Reeves is that she is eventually forced into her own messy reset.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
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